Would Huizhou Speed Wireless TechnologyLtd (SZSE:300322) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Huizhou Speed Wireless TechnologyLtd

How Much Debt Does Huizhou Speed Wireless TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Huizhou Speed Wireless TechnologyLtd had debt of CN¥1.11b, up from CN¥837.1m in one year. However, it also had CN¥514.7m in cash, and so its net debt is CN¥593.1m.

A Look At Huizhou Speed Wireless TechnologyLtd's Liabilities

According to the last reported balance sheet, Huizhou Speed Wireless TechnologyLtd had liabilities of CN¥1.49b due within 12 months, and liabilities of CN¥332.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥514.7m as well as receivables valued at CN¥821.6m due within 12 months. So it has liabilities totalling CN¥481.1m more than its cash and near-term receivables, combined.

Of course, Huizhou Speed Wireless TechnologyLtd has a market capitalization of CN¥4.61b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Huizhou Speed Wireless TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Huizhou Speed Wireless TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 5.5%, to CN¥1.6b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Huizhou Speed Wireless TechnologyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥161m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥268m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Huizhou Speed Wireless TechnologyLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.